China in 2016

Fears about China’s economic conditions made global share markets plunge at the beginning of this year. Still, some key trends provide investors with opportunities in this increasingly diverse and volatile $11-trillion economy.

In China’s 13th five-year plan, the government stresses their goal to achieve economic growth of six percent or more and added some quality-of-life indicators including factors about the environment, health, income. As economic stimulus remains the core objective of fiscal and monetary policy, McKinsey warns to expect lower interest rates and pressure on the Renminbi against the US-Dollar in 2016. Reforms will push the economy towards a more market-based allocation of capital.

Despite a bad start in the year, China will surprise pessimist in 2016, says Steven Bell, Chief Economist at BMO Global Asset Management. China is supposed to have overcome the weak period of mid 2015 and, similar to McKinsey, he expects the effect of monetary stimulus to impact the economy even further in 2016.
Wilfred Sit, Chief Investment Officer Asia at Baring Asset Management, agrees. Despite China facing an economic slowdown, he sees no signs of recession. China and other Asian markets are still attractively valued and investors should use the share market drop as a point of entry into the market.

Besides, McKinsey expects the Chinese economy to build more infrastructure to enhance intraregional development, increase green initiatives and green innovation and finally realise labour productivity. While some jobs will disappear, individual losers are created, which the government must retrain to keep people engaged in the economy and make them participate in his growth. Pressure for higher productivity and on jobs overall will lead to lower growth in household income and, potentially, an erosion of consumer confidence in 2016, says McKinsey.

Some investors lose confidence to handle those issues. “Weakness in the yuan prompts greater capital outflows from China, which in turn prompt greater currency weakness, resulting in a classic negative feedback loop. What is also clear is that market participants have lost a great deal of faith in the ability of Chinese authorities to manage an increasingly complex economic and market landscape,” says MFS Investment Management.
Larry Hatheway, Chief Economist at GAM, advices investors as well to be cautious with investments in China as the country could still provide for negative surprises.

To restore investor confidence, Chinese authorities need to become more transparent and communicative. One step towards more transparency was already taken with the introduction of the China Foreign Exchange System (CFETCS) that shows the strength of the Renminbi in relation to a basket of foreign currencies, says Wilfred Sit.

Yet, McKinsey expects a shift to safer investment vehicles due to volatile property and stock markets in 2016. While the wealth management changes for Chinese investors, there are also opportunities for foreign fund managers and brokers as a result of regulatory changes, such as international companies recently receiving approval to open 100 percent–owned investment-management operations and a foreign-controlled brokerage operation. Gordon Orr, director emeritus of McKinsey and senior external adviser, hopes “that in 2016 the government will allow more investments to fail and will stop organising bailouts, progress will be incremental.”

Yet, a key trend for China is its ongoing urbanisation. Beijing’s population officially grew by 60 percent, to 21 million, in just the past 14 years—and unofficially by significantly more, says McKinsey. “The demand for real estate remains high in some regions. In total, the fundamental data of real estate make a very strong impression,” says Michael Acton, CFA®, Director of Research at AEW Capital Management.